Cloud computing ETFs shine through market storm

May 2nd, 2020 | By | Category: Equities

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Cloud computing companies have emerged as big winners from the Covid-19 pandemic with ETFs providing exposure to the sector notching up gains of 33% on average since 16 March, compared to 19% for the S&P 500 (as of 1 May 2020).

Cloud computing ETFs shrug off rainy days

Cloud computing ETFs have gained roughly 33% since mid-March, well above the 19% return on the S&P 500.

Cloud ETFs in Europe include the First Trust Cloud Computing UCITS ETF (SKYU LN), the WisdomTree Cloud Computing UCITS ETF (WCLD LN) and the HAN-GINS Cloud Technology UCITS ETF (SKYY LN).

U.S.-listed cloud ETFs include the First Trust Cloud Computing ETF (SKYY US) and the Global X Cloud Computing ETF (CLOU US).

Cloud companies are well-positioned to facilitate businesses and organizations to quickly adapt to the rapidly changing environment as cloud solutions are highly scalable, helping to minimize disruption to regular activity.

Consequently, cloud computing companies have reported a massive increase in demand for their services as the global lockdown forces organizations and individuals to move their business activities, schooling, and entertainment practices online.

Cloud computing has also been credited for helping to combat the pandemic directly as doctors and other healthcare workers provide services remotely and collaborate with peers internationally in the global effort to find treatments and vaccines.

The largest providers of cloud computing services are the technology companies that have become household names – Amazon (Amazon Web Services), Alphabet (Google Cloud), and Microsoft (Azure).

Each of these firms has reported a spike in cloud demand (growth of 775% in the case of Microsoft’s Azure) as well as total company earnings that exceeded analyst expectations. In addition, all three companies display cash-strong balance sheets that make them resilient to the impact of recession over the coming months, helping to maintain investor trust.

But the sector’s strong performance has not been driven solely by the mega-caps, with cloud computing stocks of all sizes participating in the rally.

To highlight this, the WisdomTree Cloud Computing UCITS ETF has comfortably outperformed the broader stock market despite not holding any of the aforementioned tech majors. The methodology behind its underlying index, the BVP Nasdaq Emerging Cloud Index, requires firms to derive at least half their revenue exclusively from cloud services, a precondition that excludes the three tech titans which generate substantial revenues from other business areas.

This touches on an important point: not all cloud ETFs are the same. As with all ETFs – and particularly thematic products – a careful examination of index methodology is required.

The First Trust Cloud Computing UCITS ETF, for instance, tracks an index called the ISE Cloud Computing Index which consists of securities globally that are pure-play cloud, non-pure-play, or technology conglomerate companies. Constituents are equally weighted within each segment, while technology conglomerates are limited to a collective 10% index representation.

Its exposure is markedly different from the WisdomTree cloud ETF, and different too to the HANetf/GinsGlobal offering.

The HAN-GINS Cloud Technology UCITS ETF is linked to an index called the Solactive Cloud Technology Index which also takes a global focus, selecting 50 stocks that are most closely related to the theme of cloud computing. However, it uses an artificial intelligence-based natural language processing algorithm to identify holdings, unlike the BVP/Nasdaq index which has significant human involvement. Stocks are weighted by free-float market cap with a single issuer cap of 4%.

All three ETFs offer a different slant on the cloud theme, but one thing is for sure: European investors haven’t shared in the gains and don’t appear to have fully recognized the potential of the cloud theme. Assets in U.S.-listed cloud ETFs stand at almost $3.5 billion collectively, compared to less than $250 million for European-listed cloud ETFs.

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